UK taxation for futures and options trading

It's a very difficult one. To get anything like a straight answer is probably going to involve hiring a very expensive accountant, and that would just get you an opinion.

Don't forget that we are a small group. The vast majority of retail clients who use derivatives spreadbet. That just leaves institutional traders, or the very few retail clients whom HMRC counts as professional traders and allows to use income tax, where there is none of the matching issues.

Here is the law

(http://www.legislation.gov.uk/ukpga/1992/12/part/IV/enacted)

Sections 143 onwards deal with options and futures. There is nothing there that answers your question.

Logically if you have been submitting tax returns on this basis for the last couple of years, then what you're doing is 'correct', since HMRC has accepted your calculation.

I would imagine HMRC would have no motivation to challenge you unless (a) the amounts of money involved are significant and (b) you're doing something weird, rather than one of a few possible common sense approches or (c) you've changed your approach multiple times to save on tax.

AndyJ said:
Hopefully this thread has not gone too cold yet, as this is an interesting discussion, and one of the only places I've managed to find any information on this particular subject! (at least from a UK perspective).

I've been using IB to trade US listed options for the last couple of years, working out the tax calculations/payments in the same way as described by "globaltrader", i.e. as CGT based on the profit/loss of any transactions (converted into GBP on date of transaction minus any charges/commission). I use a spreadsheet to help create a list of all the transactions, which I then plug into http://cgtcalculator.com/ to do the actual tax calculation, and use the output from this on my tax return.

My question is more about the actual matching of the trades, as up to now, I've been using the "name" of each specific option, e.g. "AAPL-17JAN15-100-C" (Apple call option with $100 strike expiring Jan15) so that trades of that same option get matched with each other to calculate the profit/loss, but trades of a different option (for the same underlying stock) would be treated/matched separately. Is this the correct way of doing this, or should different options of the same underlying stock (plus any trades in the actual stock itself) somehow by lumped together and treated as trades in a single entity? Clearly that would be a pretty complicated calculation to try and work out, especially if you have multiple trades of multiple different options, but I'm curious as to how HMRC might see this, and indeed whether anyone has been challenged for doing it the way described above (or any other "sensible" way that they thought was acceptable based on the limited information published about this!).
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I have traded UK (FTSE) options since '99 and I am self employed so I have the usual thresholds. I also took on some PAYE work which is no problem on the self assessment tax return-you get a P60. It's hard,when you make a living from something,to avoid tax, but I'm happy to do so and have had a few miserable years where there has been no liability-so be happy and pay tax!
 
Windlesham1 said:
I have traded UK (FTSE) options since '99 and I am self employed so I have the usual thresholds. I also took on some PAYE work which is no problem on the self assessment tax return-you get a P60. It's hard,when you make a living from something,to avoid tax, but I'm happy to do so and have had a few miserable years where there has been no liability-so be happy and pay tax!
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Thanks for your reply. But if you are not self-employed and your main source of income is the salary, is the profit from option trading treated as capital gain for tax purposes?
 
No- it's income so the threshold remains the same and the rates are income tax rates. You can use CGT rules if it's simply a matter of buying an asset and selling it again,but when it's been your main job, and it is trading, it's income, not a capital gain. I have been registered for umpty years as an options trader and trying to explain it to HMRC is hopeless-they do not understand how you can sell something you don't own!
If you have a full time job and trade options on the side,then CGT rules would apply-it's too late for me I think-and anyway I don't mind paying tax-it means I'm winning
 
the learner said:
Thanks for your reply. But if you are not self-employed and your main source of income is the salary, is the profit from option trading treated as capital gain for tax purposes?
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Imho, yes. My accountant (many years ago now), told me to do some taxable income work rather than just trading, said the gains/losses from trading would then almost certainly be viewed as capital gains/losses for the purposes of tax i.e. cgt would apply and not income taxes.
 
Windlesham1 said:
No- it's income so the threshold remains the same and the rates are income tax rates. You can use CGT rules if it's simply a matter of buying an asset and selling it again,but when it's been your main job, and it is trading, it's income, not a capital gain. I have been registered for umpty years as an options trader and trying to explain it to HMRC is hopeless-they do not understand how you can sell something you don't own!
If you have a full time job and trade options on the side,then CGT rules would apply-it's too late for me I think-and anyway I don't mind paying tax-it means I'm winning
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I have a full time job that is unrelated to trading. The salary from this activity is my main source of income. On the side I trade options but tgat is just a way to invest my money.
Any profit generated by the trading activity is an extra so the problem is just to understand if HMRC will see these as capital gains and tax them at 18% only for the part that exceed the current capital gain tax free allowance.
Reading your last sentence it seems that I could report P&Ls generated by trading options as capital gains in my self assessment.
 
Visaria said:
Imho, yes. My accountant (many years ago now), told me to do some taxable income work rather than just trading, said the gains/losses from trading would then almost certainly be viewed as capital gains/losses for the purposes of tax i.e. cgt would apply and not income taxes.
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So did you manage to make HMRC see options' P&Ls as capital gain after you found a full time job?
 
I promised I would update you on what happened with HMRC. Sorry for the delay.

So I put in my tax return assuming all my profits would be classed under CGT rules. This was my only income apart from some dividends that I also received (that were less than 10% of my income). The reason I did this was because it gave me a lower tax bill; and also in future years I will have the opportunity of tactically selling my long only investment portfolio to optimise the size of my capital gains (something I can't do with futures as it's fully automated and systematic).

HMRC accepted this return, so this seems to confirm all the anecdotes on the web that HMRC are happier to class futures traders as making capital gains than earning an income.

By the way if you were convinced you'd be profitable, and you had no other income, there is no reason at all why you'd want to be paying income tax rather than capital gains. The CGT and personal allowance are about the same size; but the basic rate of CGT is 18% vs 20% and the higher rate advantage is even better: 28% versus 40% (and 45% over £150k). This ignores the fact you'd have to pay national insurance if you were classed as an income earning trader; though you might benefit from deducting some of your costs (and also the esoteric possibility if you were trading through a firm and using mark to market accounting which could shift profits around a bit from year to year).

I'd be curious to hear from @Windlesham1 as to why they went down the route of paying income tax since I can't really see any advantage to it.

GAT
 
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